A fixed interest security was issued on 1 January in a given year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 110 % 20 years after issue. An investor whopays both income tax and capital gains tax at a rate of 25% buys the security on the date of issue. Income tax is paid on coupons at the end of the calendar year in which the coupon is received.Capital gains tax is paid immediately on sale or redemption. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effective. (ii) Calculate the duration of the netpayments from the fixed interest security for an investor who pays income tax as described above but who does not pay capital gains tax, at a rate of interest of 6% per annum effective.

calculate the present value of the coupons and the redemption value, and then we'll use the formula…

year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 11 buys the security on the date of issue. Income tax is paid on coupons at the end of the calenda n. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effectiv ho pays income tax as described above but who does not pay capital gains tax, at a rate of intere

year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 11 buys the security on the date of issue. Income tax is paid on coupons at the end of the calenda n. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effectiv ho pays income tax as described above but who does not pay capital gains tax, at a rate of intere

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

A fixed interest security was issued on 1 January in a given year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 110 % 20 years after issue. An investor who
pays both income tax and capital gains tax at a rate of 25% buys the security on the date of issue. Income tax is paid on coupons at the end of the calendar year in which the coupon is received.
Capital gains tax is paid immediately on sale or redemption. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effective. (ii) Calculate the duration of the net
payments from the fixed interest security for an investor who pays income tax as described above but who does not pay capital gains tax, at a rate of interest of 6% per annum effective.

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